What is ESG and why is it so important?
If you are asking yourself this question, you’ve come to the right place.
ESG stands for ‘environmental, social and governance’. It encompasses a range of criteria that ‘responsible’ companies use. You may already report on ESG performance to your investors and employees, or you may just be starting your work on ESG issues.
Non-financial reporting measures have become increasingly scrutinised by investors, and these include a range of strategic reporting criteria concerning employee stakeholders. These people, talent and development agendas sit within the domain of HR and have recently seen a dramatic rise in strategic importance across the c-suite.
Many acronyms (CSR, ESG, DE&I…) are used to describe non-financial performance, an ever-more important factor for ‘responsible business’. This guide will help you understand more about ESG performance and how HR has a crucial role to play in the determination, implementation and measurability of many ESG criteria and their reporting.
When your CEO comes knocking on HR’s door looking for quantifiable evidence around ESG-related people issues – such as diversity, equality and inclusion (DE&I), gender pay equity, upskilling and employee development, and workplace culture – will you be ready to provide it?
With a growing public expectation that businesses should use their resources to take positive action on workforce DE&I, as well as issues relating to the environment, sustainability and wider societal change, can everyone in your organisation talk confidently about your ESG performance?
Poor ESG performance can have a negative impact on productivity, profitability and reputation. Investors demand transparency on ESG performance. Consumers increasingly consider ESG factors when buying products and services and making investments. Employees want to use their talent and time to make the world a better place.
Delivering against current global and local ESG challenges requires excellent and agile leadership. HR has a pivotal role to play. We’re here to inspire and support as well as to canvas the wisdom of the crowd from members of our senior HR community who are learning, in real time, how they can partner with the c-suite to articulate and explain the ways in which people and talent agendas impact on meaningful ESG strategy.
Read on to learn more about the importance of ESG to HR leaders and find answers to these questions:
ESG stands for a broad range of ‘environmental, social and governance’ criteria which organisations use to run themselves ‘responsibly’.
Issues linked to ESG include workplace and employment practices as well as environmental impact, sustainability, diversity, equality, social good and leadership, to name a few.
It is a framework for looking at non-financial factors alongside financial factors in the investment decision-making process. Investors now use ESG performance data to make decisions.
Investors who would previously ‘screen out’ socially unfavourable stock such as arms or tobacco now rate businesses by looking at the whole range of ESG performance data – from the reduction of carbon emissions to pay equity and gender and ethnic mix in the boardroom.
The CFA Institute explains that ESG issues are often interlinked. Measuring impact is challenging, with a wide range of metrics used.
Businesses that recognise the positive link between ESG performance and financial performance know they need to evidence:
These and other ESG metrics are now used to demonstrate the responsible governance and positive impact of businesses.
Are you building ESG issues into your strategy and reporting effectively on ESG to all your stakeholders? Below, we provide a range of conversation starters.
The Paris Climate Change Agreement in 2015 committed governments to net-zero emissions by 2050. The UK government’s intermediary commitment in 2020 aims to reduce the UK’s emissions by at least 68% by 2030.
Environmental criteria look at business performance on stewardship of the natural world and typically include data on carbon emissions, progress towards 100% use of renewable energy, management of hazardous waste, resources used, and the consequences of emissions; for example, poor air quality and water contamination.
There is increasing alarm at the speed of climate change. In the latest report by the United Nations’ (UN) Intergovernmental Panel on Climate Change, climate scientists warn that we are already perilously close to tipping points that could lead to cascading and irreversible climate impacts.
UN Secretary-General António Guterres has called for action to triple the speed of the shift to renewable energy, warning that “we are on a fast track to climate disaster”.
The UN states that to keep the 1.5°C limit agreed in Paris within reach, global emissions need to be cut by 45% this decade. But current climate pledges would instead result in a 14% increase in emissions.
Guterres describes any continued investment in new fossil fuels infrastructure as “moral and economic madness” when cheaper, renewable solutions provide green jobs, energy security and greater price stability.
S = Social
ESG reporting on social criteria typically looks at your organisation’s relationships with people (customers, suppliers, employees) and your reputation in the communities in which you operate.
G = Governance
Typical ESG governance criteria cover the internal business processes, controls and procedures that your company uses to make decisions, for legal compliance, and to meet the needs of external stakeholders. Most importantly, governance looks at leadership.
Investors and employees may want to know the following:
Your organisation might already have (or be aiming for) membership of the FTSE4Good Index, the Prince’s Responsible Business Network, the Good Business Charter, or the UN Global Contact Network UK.
The impact of the global pandemic and increased urgency about the climate emergency have brought about greater focus on ESG performance.
Businesses are now expected to create positive action on:
The search for strategies for creating a sustainable business is becoming more pressing.
A growing cohort of millennials is placing great emphasis on human capital, social justice and the environment.
Over the past two years investors have moved record sums of money into ESG funds focused on improving the environment and promoting social good. Bloomberg Intelligence shows the meteoric rise in ESG-orientated investing.
Since Russia’s invasion of Ukraine, our attention has been focused on the war’s horrifying levels of human suffering. But the conflict is having a far wider global impact.
UN Secretary-General António Guterres recently warned: “The war is supercharging a three-dimensional crisis – food, energy, and finance – that is pummelling some of the world’s most vulnerable people.
“We are now facing a perfect storm that threatens to devastate the economies of many developing countries. We can maximise this moment to push for the transformational change our world needs. Look no further than the energy crisis.
“We must work towards phasing out fossil fuels, accelerating the deployment of renewable energy, and pull developing countries back from the financial brink.”
The importance of improving DE&I is also being debated at the highest levels. In March 2022, the World Economic Forum launched the Global Parity Alliance to accelerate better DE&I outcomes.
The inequality gap, particularly for BAME communities, has been further exacerbated by the pandemic. George Floyd’s death at the hands of police in the US brought racial discrimination to the top of the global agenda. The UN Principles for Responsible Investment call for proper disclosure and action on racial diversity (www.unpri.org/about-us/what-are-the-principles-for-responsible-investment).
All stakeholders, employees, regulators, shareholders, customers and non-government organisations (NGOs) are now increasing their scrutiny of the connections between sustainability and financial systems and demanding greater accountability and leadership on ESG issues.
Companies can attract negative reactions in the media, on social media and in their communities if they fall short on major ESG issues.
The enormous challenge of limiting the global temperature increase to 1.5°C by 2030 to avert a climate emergency has created growing demand for urgent and more radical action.
Participation in non-violent protests has significantly increased. People of all ages in the UK took to the streets recently in demonstrations to highlight government inaction on climate change.
James Cook, in September 2021, explains:
“ESG and Corporate Social Responsibility (CSR) are both concerned with a company’s impact on society and the environment. The major difference between them is that CSR is a self-regulating business model used by individual companies, but ESG criteria are what investors use to assess a company and determine if they are worth investing in. Studies suggest that more environmentally minded firms offer better returns for investors, so ESG and CSR are two important considerations for businesses, especially start-ups.”
Sources and useful links:
The UN has defined 17 Sustainable Development Goals (SDGs) which it wants to achieve by 2030. These include:
Some 40% of the world’s biggest companies use SDGs in their reporting processes. By aligning your ESG strategies with the SDGs relevant to your business, and measuring your real impact, you can highlight your contribution.
The term ESG was first used in 2005 by former UN Secretary-General Kofi Annan, who commissioned Who Cares Wins, a groundbreaking report that set out how to better integrate environmental, social and corporate governance issues in investment management.
Your reputation on ESG performance affects all aspects of your business.
Accountability on ESG factors is now the norm. Today, investors, fund managers, employees, regulators and consumers all scrutinise ESG performance.
Investors now actively score a company on ESG factors. A favourable ESG score can help to attract investment and talented employees, and enable greater access to capital. Fund managers look at ESG factors to assess opportunities and risks that may affect a company’s long-term sustainability.
If you are still wondering why ESG matters for all organisations, you may be surprised to learn the extent to which ESG issues drive investment decisions, business strategy and employee motivation.
The global pandemic has resulted in greater focus on the social impacts of a business, particularly on its workforce and wider supply chain, including:
HR expertise and leadership can be vital to business success on ESG.
HR professionals can play a vital role in supporting businesses and employees to adopt ‘green’ behaviours.
Examples of easy to implement ‘green’ goals:
HR professionals can also build support for ‘green’ responsibilities at management and c-suite level. Buy-in from senior business members will ensure that environmental practices are adopted at every level.
You might, for example, be looking to improve your culture of learning and development, setting targets for a diverse and inclusive workforce, or establishing a completely sustainable supply chain.
If so, you should be reflecting on the following:
Use these questions as the basis for conversations with internal stakeholders working in procurement, CSR professionals and the c-suite.
If you’re thinking about how HR can have more influence on how people factors are considered in board level decision making, Ed Houghton, the CIPD’s Head of Research and Thought Leadership, recently set out three key approaches:
The Corporate Governance Code states the need for employees to be considered in boardroom decisions, while the Wates Principles set out by the Financial Reporting Council hold that a board is responsible for overseeing meaningful engagement with stakeholders, including the workforce.
Consideration of all your stakeholders is key to ESG performance. As well as employees, ESG matters to your shareholders, retired staff, investors, customers, suppliers, charities and the wider communities in which you operate.
Sources and useful links:
Using ESG metrics to govern helps businesses achieve a positive impact on society and the environment and enhances long-term business performance.
The HR metrics you need to measure ESG performance and drive improvements will depend on what sort of business you are in, but could include the following examples:
One of the most important HR measures is assessment of the organisation’s culture from an ESG perspective.
Typically, the CEO – and board – will lead on and integrate ESG ‘purpose’ across an organisation and mitigate the risks of strategic ESG challenges.
Other senior leaders, including HR, will help develop ESG strategy and communications. Some businesses have chief ESG officers or chief sustainability officers. Managers across your business need to be able to champion ESG.
Organisations face increasing scrutiny of their ESG performance. As an HR leader, you’ll want to mitigate any risk of litigation or regulatory sanctions. Risk implications will vary from business to business.
ESG is now a key driver for new laws, performance standards and reporting. Legal compliance is evolving to include ESG risk governance. Find out more about why employment law enables responsible business behaviour.
There is a particular focus on whether you are operating in a sustainable way, and without violating human rights. You will want to have robust checks in place to avoid employing victims of modern slavery or use of child labour anywhere in your parent company or supply chain.
There are Guiding Principles on Business and Human Rights (UNGPs) which businesses can pledge to follow.
Diligence on human rights is particularly relevant to larger businesses, which must comply with the UK’s Modern Slavery Act.
Choosing sustainable suppliers which have a positive impact on society and effective governance will contribute to meeting your ESG goals.
Screen your suppliers during onboarding and procurement, focusing on the ESG metrics that are important to your business.
As organisations increasingly recognise the importance of environmental, social and governance (ESG) factors, learning and development programmes are emerging as a crucial driver of change. While many focus on ESG initiatives from an operational standpoint, the role of HR and learning in fostering a sustainable and responsible corporate culture is often overlooked.
As companies strive to align their practices with ESG principles, learning and development (L&D) programmes play a vital role in driving this transformation. By fostering employee awareness, knowledge and skills, L&D programmes can effectively support and enhance an organisation's ESG initiatives.
Incorporating ESG principles into L&D programmes not only benefits organisations by aligning their operations with global sustainability goals but also empowers employees to become agents of positive change.
Doing so allows organisations to develop intrinsic motivators like growth and development, increasing employee engagement and driving retention and growth. A modern learning culture is all about meeting the challenges of a rapidly transforming world, as our whitepaper on the future of learning demonstrates.
By equipping them with the necessary knowledge and skills, organisations can cultivate a workforce that is conscious of its environmental and social impact, ultimately leading to a more sustainable future.
Building ESG principles into an organisation’s core requires a strategic approach. As a core function, learning and development departments can support this process by training employees on the business case for ESG integration, how it aligns with strategy and on the specifics of external reporting.
Corporate learning programmes are deeply involved in embedding ESG practices into organisational mindsets and processes. More than 80% of the world’s largest companies now report on ESG or sustainability metrics and performance. As organisations also invest heavily in learning programmes to reskill and upskill their people, it is vital these programmes drive meaningful change through the business.
Through workshops and interactive sessions, employees can learn about the financial benefits of sustainable practices, the importance of risk management in ESG contexts and how responsible governance enhances long-term value. By providing employees with this knowledge, organisations can foster a mindset where ESG considerations become integral to decision-making processes at all levels.
ESG challenges often require innovative solutions that go beyond conventional practices - and learning programmes are vital to developing the skills needed for innovation.
In fact, the more innovative your learning programmes and technologies, the more likely you are as a company to produce innovative solutions. A 2022 report by Josh Bersin called The Definite Guide to Corporate Learning: Growth in the Flow of Work studied 94 L&D practices at more than 1,000 organisations around the world.
It found that companies who experiment with learning technologies are twice as likely to innovate as those that don’t develop similar initiatives. It also posited five key traits that learning and development team need to develop:
Learning and development programmes can nurture a culture of innovation and collaboration by encouraging employees to think creatively and explore new ways to address environmental and social issues. By incorporating design thinking methodologies and promoting cross-functional collaboration, these programmes can empower employees to develop sustainable solutions that benefit the organisation and society as a whole.
They can also bring together individuals from different backgrounds and departments to exchange ideas, best practice and network. This collaboration can lead to the development of innovative strategies and initiatives that promote sustainability and social impact.
The current business climate is driven by uncertainty, rapid transformation and unpredictably. It is vital that leaders have the skills and ability to adapt to change, act responsibly and deliver on promises to stakeholders without causing detriment to the wider world.
Even the biggest companies will have to adapt to become socially responsible. BlackRock CEO Larry Fink argued that climate change is becoming the defining factor in corporations’ long-term prospects in his 2020 letter to CEOs, putting ESG on the same level as financial returns when it comes to investing.
Learning and development programmes can equip leaders with the knowledge and skills needed to integrate ESG principles into their decision-making processes, but it’s important to remember that this is an ongoing process. Training isn’t about taking one course of action, but a commitment to ongoing learning.
By providing training on ethical leadership, diversity and inclusion, and community engagement to senior managers, organisations can create a pipeline of socially responsible leaders.
These leaders will understand the importance of social impact, employee well-being, and stakeholder engagement, which are integral components of the ESG framework. They can drive positive change within their teams and influence the organisation's overall commitment to ESG goals.
Learning and development programmes serve as an ideal platform to raise awareness about ESG issues and their significance. By integrating ESG topics into training modules, workshops and seminars, organisations can ensure that employees understand the relevance of sustainability in their daily work. These programmes can educate employees about the environmental impact of their actions, the importance of social responsibility, and the need for transparent governance practices.
Learning and development initiatives can also help to cultivate a culture of sustainability within an organisation. By fostering a sense of shared responsibility and empowering employees to make environmentally and socially conscious decisions, companies can create a positive impact that extends beyond the workplace.
The modern employee understands that the world of work is rapidly transforming and that they will need to develop new skills as they move throughout their careers. Consequently, learning programmes and on-the-job training is highly valued by employees.
LinkedIn’s 2023 Global Talent Trends report found that organisations who offer on-the-job learning can expect a 7% higher retention rate than those that don’t. For companies of around 5,000 employees, this can equate to more than 200 retained employees over their competitors.
A study by Deloitte backs this up, suggesting that organisations with a strong learning culture have retention and engagement rates that are 30-50% higher than competitors. Of course, the benefits of a learning culture extend beyond just retention.
The same research found that organisations with a strong learning culture are 92% more likely to develop novel products, 52% more productive, 56% more likely to be first to market than their competitors and are 17% more profitable.
Organisations that invest in their employees' professional growth demonstrate a commitment to their well-being and development. By offering learning programmes that incorporate ESG principles, companies show their dedication to creating a sustainable future. This fosters a sense of pride and engagement among employees, leading to higher retention rates and a more motivated workforce.
Developing a successful ESG strategy is impossible without the buy-in and input of your people. Human capabilities and behaviours are vital in shaping sustainable and responsible business practices, so providing learning and development programmes that incorporate ESG is a must.
Core human skills include abilities such as critical thinking, empathy, communication, collaboration and ethical decision-making - all traits that are needed to successfully integrate ESG principles into an organisation. Critical thinking enables employees to analyse complex challenges and build innovative solutions. Empathy and communication skills foster stakeholder engagement and allow organisations to take in diverse perspectives.
Collaboration allows for cross-functional efforts to address ESG concerns, improving employee engagement and removing blindspots. Finally, ethical decision making underpins the choices a business makes, ensuring responsible governance practices.
Core human skills also contribute to cultivating a positive corporate culture that aligns with ESG goals. An organisation that values these skills promotes a sense of responsibility, accountability, and transparency, reflecting good governance practices. Employees with strong core human skills are more likely to embrace sustainable practices and act in socially responsible ways, leading to improved ESG performance.
If core human skills like critical thinking, empathy, communication and collaboration are key to developing effective ESG strategies, then learning programmes that provide these core skills are vital too.
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